Servcorp Limited (SRV) Earnings Call Transcript & Summary

I'll go back in 2 -- just for the 2 little bits and say, we're going to open 15 new centers, which will add about 20% to Servcorp's size. And that's a summary of the last 5 minutes. But if I look at Servcorp and I look at what it's costing us to build a center with proper infrastructure because everybody thinks there's no barrier to entry. Well, the barrier to entry is now the cost to build this, if you're going to do it correctly so that you can compete in the marketplace, in my view, is between $4 million and $5 million a center, and that's before you fill them. So we've got 120, and we're going to build another 15. So let's say we've got 140 to 150 centers, 140 will do. That's about my next target. 140 centers is -- at $5 million a center is $700 million. That's before you start to fill them. And as everybody that's going into this business is finding, it costs a lot to fill them. So I think that to effectively compete with Servcorp, to set up a basic system and to operate in some of the major cities would cost any competitor no less than $1 billion. So if I reflect on where Servcorp is at, it's still profitable. It should make its $60 million this year. The second half should be about the same as the first half. But a lot's happened that people can't see. We, for 20 years, we're running on an old data system, which we tried to replace. And over the period of time, we wrote off around about $20 million. That's for a 10-year period. And we're now replacing it. We've got a new system that we've built. We've written off about 50% of the capital cost. And that we call that -- unfortunately, it was developed by Japanese developers. And because we're an Aussie company, they call the [ buddy ] system the Wombat, and the name has never gone away. So we've got a data system called Wombat. But the managers globally love it, and it's gone out to about 60 floors. It's intuitive. It gives us real-time access to what's happening within the Servcorp environment. Also last year, we rolled out the new general ledger. And those 2 systems have allowed us to commence retiring a lot of license expense that we've had. This year and particularly in this second half, we'll be spending about $1 million more than we spent last year on travel and training because we really believe that if you're going to be successful in this business, you've got to have a trained team and you got to have a template that people can follow. We have a management meeting with 120 managers coming from the international locations, so it's next week. And not next with, not this coming weekend, but the following weekend. We've changed our management structure, and we've addressed some of the problems we've got in Australia, New Zealand, China and Hong Kong. That's not to say we've solved China, Hong Kong or the United States. The U.S. is about break square from a cash perspective, but it's still badly run, general Manager knows, and it is badly run. The Chair's been able to travel, and she was a new General Manager. So she still runs to the Regus system, which is built. I guess we shouldn't say that. Well, it's a great system. It just have to lose money. That -- and so she'll be here. It's very difficult to run the U.S. from Australia. So we will change that, and we'll run it from the Middle East. China and Hong Kong are problematic. I look at Hong Kong and say, well, the Chinese government doesn't seem to care much whether expats can operate in and around Hong Kong or not. And so unless we can negotiate reasonable rents that allow us to be profitable there, Hong Kong, we may move most of our operations from Hong Kong and Singapore. China, well, it was locked down for a long time, and it's a lot slower coming back than most people would think. So they're the problem areas. They are far outweighed by the areas where we have great progress. Europe is improving, Middle East, Japan's okay, Southeast Asia is on the improve. And so I look at Servcorp, and I don't think that I've been quite as excited about the coming calendar year. I think the first half, we're going to finish rolling out all of these systems. The second half, we'll start opening new centers, and which will be the first half of the new financial year, and I'm pretty confident about it. And from there on, I think that we shall be successful and continue to grow it between 15% and 20% a year. If I have a look at the openings and closings, we have over 600 competitors just in Tokyo. And every major brand, it doesn't matter whether it's executive and a Regus, all of the big operators out of the U.S. and everybody out of Europe, they're all there. But they have been opening at 10 to 20 a week, and now they're closing at almost the same rate as they're opening. So it's sort of stable. It's so hard to follow as they open and close. But nobody yet has worked out that small business needs exactly the same infrastructure as a big business, and so everybody does it on the cheap. And I'll walk into a -- I won't tell you the brand. I walked into a co-working area the other day, they had 100 offices plus the co-working areas. They had 3 incoming lines. And we're -- the business half the size, we have 40, to give you some idea, are running 2 people for a business half the size, we run 6. For business that size, we'd run 12. So there is a cost to that, but clients are slowly realizing that they do need the infrastructure. So I think Servcorp's got a great future. Yes, I'm finished. Anybody got any questions? [indiscernible], no?

I did have 1 question. I get that question all the time. I get 2 questions. I get, one, why don't you retire? And the answer is no. Two, why don't you buy back some shares? No. If I want some shares, I'll buy some and keep them because I think Servcorp is personal. I think it's a good buy. That doesn't mean I think it's markets often, right? So I don't think it's under or overpriced. I don't care much. But I do know that when I look at executives that -- and Boards that buy back shares, I think that they advocate the responsibility given to them by the shareholders. Because if you actually believe that you've got a product, the time we'll open up the markets. And I would hate to go out to try and raise money as I keep seeing these opportunities that get a little bit further down the track, but now we're there. I mean, we're going to spend $60 million on expansion next year. And we're going to spend -- if we do the $0.10 a time and continue with the $20 million in dividends, so that's $80 million. I might add that we've got more than $115 million in cash, and we're producing more than $1 million a week in free cash. But doesn't alter the fact that if I want to go to the market, I don't want to raise money, if I had to go to the market, raise money at $3. And if I had to go to the market, the market wouldn't want to give me any money anyway. So no buybacks. Any other questions? What's that? The same 2 questions I get every year.

[indiscernible] And now you that see [indiscernible].

We'll start with opening new centers where we've got management depth. And the majority of our new centers are in commodity-based environments or in Japan. And so that when you open a new sale, you're co-working in virtual pages a reasonably substantial part of your rent. And a new geographic location is better than expanding at the same location. But I mean, we're doing a couple of more, a few more in Saudi because we're pretty full there. And there are some cities that we're not in, in that part of the world, which we're working on. And we're probably doing another one in Doha, but that's a very small town, but -- and can somebody just play that. I had a video, the Epic -- the new Epic video. Can somebody hit the button on that? This just sort of gives you a little tiny. [Presentation]

The guy is not little. The truck is just too big for him. I mean Tokyo now, around Tokyo Station, we've got 7. A new 1 opened this week. One of the ones that I talk about that's new. It hasn't gotten clients yet. That's called [ Yanmar ], and it costs about $6 million. That's Doha. We've got a new 1 on the go there. That's a great location right in the middle of Doha. Dubai, of course. That's the right at front of our building, that's the Museum of the Future. Abu Dhabi. Well, interesting enough, we were in partnership, we were with the Prince, but he's now become the ruler of the UAE in [indiscernible]. And people got no idea of the bits Servcorp has because it's a little Aussie company on the Aussie Stock Exchange. Nobody really understands it. Because I listen to even our own shareholders talk about it. They got no idea. Well, we've never had proper management in Germany. So that's another one that's got some potential. If we ever get management, we'll build around it, but we haven't succeeded yet. The -- so then if you skim that back a little and you have a look and say, you've got $115-plus million in cash, you've got net assets of $200 million on the balance sheet, of $220 million. So you've got $100 million theoretically employed in your business, and you're throwing $60 million in free cash. Or if you look another way, your market cap's $300 million. You've got about 40% of it in cash. You're going to throw $60 million. So you got $200 million in assets. So that's this year. Next year, the current growth rate should throw $70% million. So you're at 3x. And I just look at it and go, I don't think the shares are underpriced. I don't think they're overpriced because the market sets the price. I just look at it and go, I don't think we're going to get broke. And I can't see anybody out there that will send us broke. But I can see a lot of people slashing and burning, and we're surviving in this environment where people are going broke, right? And so I have a look at WeWork's numbers. They come out tonight. But I've looked at WeWork's business model. So [indiscernible], the WeWork Chief Executive, I'd be recording this from Hawaii rather than anywhere near headquarters. I just look at it and go, it's okay. Servcorp's okay. It's got a lot of work still to do, but it's got a lot of potential. It's got more potential to date and at this day last year or this day 10 years ago. And when we listed, we had 30 floors, and we were projecting $14 million. While we're projecting $40 million, we had $9 million in the bank. We've got $100 million in the bank. And well, our market cap is about half what it was after we listed, as always. Go on. Got any more questions? Yes. Come on, Mr. [indiscernible].

[indiscernible] 6 months revenue [indiscernible] U.S. counter cyclical. U.S. sort of look where everyone would be running. And I just maybe 6 months ago, you weren't as paid to this money. [indiscernible], actually. What do you see is the fact that you can travel or is it the fact that some lead indicators seem to do it?

No, the fact is that we've got a general ledger that works. We've got a data system that works. And then we've got -- so we can control the business again in a modern fashion, a digital fashion, where we have real access to numbers so that now I'm a lot more comfortable building, and travel is another big part of it. But I don't want everybody to jump into plane. I mean we've -- our travel bills in the pandemic were less than $20,000 a month, mainly me. The budget for Servcorp travel is about $100,000 a month without all the people that have to come to management meetings, plus my travel, which is normally about $20,000. So look, we have places where we're stable. We've got occupancy and where we've got good management. And I think that, that's where we'll build. We're not -- the wonderful thing about Servcorp is not geographically tie so that you can get a bit of a focus. I mean I'm a bit focused on the Middle East. But if oil holds at above $70 a barrel, those economies run along at a pretty rapid rate. And we have a large team across that Middle Eastern area, and we're heading for towards 10,000 clients. We're by far the biggest in the UAE, Saudi. If you take the whole area, we're the only guys that have got all of these geographic locations, like Doha, Bahrain and all cities of Saudi, and it makes a difference. Yes. I don't think he's got the mine gone anyway. He's just trying to make you feel good, gives you something to hold.

Just in areas where you're expanding. What's happening to the rental rates in terms of where you [indiscernible]?

I'm sorry. I can't -- I didn't hear that.

In terms of...

yes. It didn't have an arm for a bit. It was okay.

In terms of the available office space, the rent is still coming down. So they're getting more attractive or is that stabilizing post that?

Well, it depends where you are. So that rents in Singapore have gone up. I really think that rents in Hong Kong have halved. Rents in China, the market, central business district market is really soft. In Japanese -- in Japan, they never tell you. So no matter how hard you try, it's very difficult to assess what's happening in the market. In the Middle East, it's more a return on the capital invested rather than what the market will bear it, what they've spent and the return they want. I mean the world is split into half. You've got all the Middle East. Australia, I think, is very strong. I still think China is going to struggle for a while getting international business people to come there because they -- in the times of isolation, they would just lock you in your building for a period of time. And in Hong Kong, they made it very, very difficult to travel into and out of. So you have to do some isolation. But even if you had a cold, you were sent to an island. Yes. So it was a bit draconian, but it scared a lot of the investors. And while Singapore was quite strict, it's really an encouraging business to come into Singapore right now. And so the prices there have gone through the roof. Price in Hong Kong have gone through the floor. It's a bit of a mixed bag. But the opportunities are there simply because it comes back to -- well, there's a third leg, there's the location, there's your management and it's a competitive environment, of course, and the economics in the marketplace. Well, the difference in the Middle East is a lot of the Middle Eastern countries, not just 1, but a lot, are now investing in themselves. And so they used to all put it all into all of these funds in London and New York. Now they're investing in their own countries, and it's making a massive difference. I'm pretty confident about that, obviously. I mean, I haven't been quite this confident for a long time because having 3 data systems sometimes meant you were fighting a fall [indiscernible]. Okay, that's it. Well, I'll finish by saying that we're pretty well at 50,000 people paying us rent every month. Is Victory still listed? I don't look anymore. Well, I don't know. It was just a question. Nobody knows, okay. You know [indiscernible]. They are listed. Okay. Sorry. How much is a month there?

$7 million.

$7 million. [indiscernible] $0.07, it's $7 million. So it's still overpriced. So look, it's a blood bath out there in this industry because everybody goes back to the same thing. And all the building owners are doing it, and they're saying, "Well, we can get twice the rent, cap it up at times 30 or 40 and put a great value on our building." But to do that, they've got to have clients. They have no idea about churn. Mitsubishi just took out a Regus in Japan, by the way, and they're the biggest real estate company in the world. And no, I'll never listen to me anyway. But they -- so some of the stuff, they're now charging -- they now want to sign a 2-year contract. Well, Servcorp was started in Japan because the landlords want 1 year's rent in advance, and we were taking a 1-year rental deposit. And we were taking a 1-month rental deposit, which meant that the capital cost was minute. And you had to sign a minimum 3-year lease with a 1-year rent paid upfront, plus you had to pay your rent each month as well so that they're always 13 months ahead. Our own people are reasonably hassled because Mitsubishi has taken over. And I think Nomura's got about 100 centers now, and Mitsubishi's got similar number. I think it's good rather than bad for Servcorp in the long term, and I think Servcorp's got a great future. God, I'm done. Anybody else got any questions?